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New Jersey: Feds wrong to block its tax deduction workaround

The IRS has proposed a rule that could block New Jersey's workaround for the federal $10,000 cap on state and local tax deductions. (AP Photo/J. David Ake, File)

Gov. Phil Murphy and Democratic legislative leaders in New Jersey say they’ll take whatever steps they can to challenge a proposed IRS rule that could block the state’s workaround for the federal $10,000 cap on state and local tax deductions.

A state law enacted in response to federal tax code changes would allow residents to get a tax deduction for contributions to new charitable funds that municipalities would create to help pay for local services.

Assistant New Jersey Attorney General Jennifer Davenport said there doesn’t appear to be any sound or clear basis for the federal policy change that could upend that program.

“New Jersey’s approach is right under the law, and it makes a lot of sense.,” she said. “And in the near future, we’ll be filing our formal objections to the proposed rule. And if the IRS continues to refuse to change course, we will take them to court.”

The IRS is setting a dangerous precedent, Murphy said.

“They are saying that, no matter what states may do, the rules as they exist and as they have been widely understood won’t apply because they’ll just change them if they don’t like what you’re doing,” he said. “And it is absolutely regulatory overreach.”

Senate President Steve Sweeney said New Jersey officials are making a statement to Washington.

“New Jersey residents should be respected and treated fairly. This is an attack on us. We send far more [taxes] than we get back,” said Sweeney, D-Gloucester. “This isn’t fair, and we are going to fix this one way or another.”

“And we’re prepared to fight this as long as it takes in every form that it takes and ultimately to do whatever it takes to make sure New Jersey taxpayers are stuck up for,” said Coughlin, D-Middlesex.

No municipalities in the state have yet created a charitable deduction fund because officials were awaiting the IRS ruling on whether that kind of arrangement was allowed.